US banks 'need to raise $75bn'

"Stress tests" show major banks short of billions of dollars if economy slows.

Thu May 07 2009 23:08:40 GMT+0000

Wells Fargo is one of 10 US banks found to need more capital if an economic crisis deepens [AFP]

Bernanke said that the results should "provide considerable comfort" to US investors as almost all of the banks has enough assets to survive the hypothetical adverse scenario.

Stress tests

Nineteen banks were asked to project their income and expenses until 2011, and disclose how much money they would have in reserve.

A stress test is a type of "worst case scenario" where the government outlines a hypothetical situation in which the economy gets progressively worse.

This one looked at how the 19 banks would fare if the economy were to shrink by more than three per cent, and unemployment continued to rise.

"Roughly half the firms, though, need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress".

The total figure also appeared to be small enough to ensure that the White House would not have to approach congress for more money after the $700bn bailout of financial firms approved last year by George Bush, the previous US president.

Citigroup, Bank of America and Wells Fargo have already received about $65bn in government bailout money.

James Galbraith, a US economist, told Al Jazeera that questions over the health of the banks remained.

"If the test showed they did not need capital, no one would believe them," he said.

"The real question is that whether the toxic assets they hold are so riddled with fraud and corruption that they [the Banks] cannot recover ... or whether they are not."

"Until the assets are examined, the stress tests are not going to give us a definitive answer."